Asia success still long shot for ambitious Fiat Chrysler

May 08, 2014|Agnieszka Flak | Reuters

(Rebecca Cook Reuters, )

DETROIT (Reuters) - If Fiat Chrysler Automobiles wants to become a significant force in Asia, it needs to succeed in China. But its track record so far in the world's largest automobile market raises doubts about its ability to deliver on growth promises, analysts say.

The newly merged auto company has been present in China for some time, but it has a market share of only 0.6 percent both in that country and in the Asia-Pacific region. It lags far behind rivals that are truly global players, including Toyota Motor Corp <7203.T>, Volkswagen AG , General Motors Co and Ford Motor Co .

Building muscle in China by producing Jeeps and more Fiats locally is a pillar of a new turnaround plan unveiled by Chief Executive Sergio Marchionne earlier this week as he pushes to boost global sales by as much as 60 percent to 7 million cars by 2018.

The strategy was widely criticized by analysts as overly ambitious, causing Fiat Chrysler shares to fall sharply on Wednesday.

"Not being present in Asia means being outside half of the global car market," said Andrea Giuricin, a transport analyst at Bicocca University in Milan, Italy. "That's a very big problem for Fiat."

Fiat Chrysler has been over-reliant on three car markets: the United States, Italy and Brazil. Marchionne acknowledges the world's seventh-largest auto group needs to catch up rapidly in Asia in order to compete in a cutthroat industry that has been hurt by Europe's still-soft demand. In addition, demand is now flagging in some of the automaker's key emerging markets including Brazil.

Fiat Chrysler sold 130,000 cars in China last year, compared with just over 3 million vehicles each for Volkswagen and GM.

It wants to sell 850,000 vehicles in China by 2018 and raise its market share their nearly fivefold to 2.8 percent - targets analysts call a stretch given the intense competition and the company's problems in getting a grip on Asia so far.

"The primary driver of growth will be the localization of our fleet," Mike Manley, head of the Asia Pacific region for Fiat Chrysler, said at Tuesday's strategic presentation. He added building locally would lower prices and enhance the company's competitiveness.

CROWDED, FRACTURED MARKET

Producing in China means avoiding import duties as high as 25 percent. Fiat Chrysler is also betting on achieving improved margins by leveraging Jeep, a more recognizable brand than the mass-market Fiat.

The two automakers first became aligned in 2009 when Italy's Fiat helped Chrysler emerge from its U.S. government-led bankruptcy. The new, combined company was formed in January when Fiat acquired full ownership of the No. 3 U.S. automaker.

China's auto sales are seen jumping nearly 50 percent by 2020 to 30 million vehicles, according to IHS Automotive, which sees the U.S. market rising only slightly to about 16.4 million vehicles by 2020.

In 1983, Jeep became the first foreign brand produced in China, and even though production stopped in 2006, Jeep still holds a large appeal with an increasingly affluent Chinese middle class that favors sport utility vehicles (SUVs).

Together with its existing joint-venture partner Guangzhou Automobile Group (GAC) <601238.SS>, Fiat Chrysler plans to start making Jeeps in China by late next year, producing the Cherokee first, followed by its compact Renegade model. The Wrangler and the Grand Cherokee will remain imported products.

Analysts said that while China is a crowded, fractured market with more than 100 brands, Fiat Chrysler could still gain a foothold with Jeep, but volumes may not live up to the company's expectations.

After previous delays in getting off the ground in China, and without a strong footing, local production of Fiats and Jeeps is unlikely to generate high volumes, said Namrita Chow, an analyst at IHS Automotive.

"It's not about being pessimistic, it's about being realistic," she said. "China is a very complicated market and there are many strong existing players."

LUKEWARM EFFORTS

Doubts over Asia added to the skepticism that greeted the group's release of its five-year industrial plan on Tuesday.

The stock fell almost 12 percent on Wednesday as analysts questioned whether Marchionne would manage to multiply sales, raise profit and slash debt, while investing 48 billion euros ($67 billion) in a global expansion led by the Jeep, Alfa Romeo and Maserati brands - and all that without divestments or a capital increase.

The array of Jeeps and Fiats the company promised for China will require significant investments and "profits and indeed the prospects for substantial cash returns (and) dividends from the joint venture may be limited in coming years," George Galliers, an analyst at ISI Group, said in a note.